JANUARY is Budget month for the Government it is also the perfect opportunity for earners and their families to review their own budgets for the coming year.
If even a few of the predictions concerning the forthcoming Budget are correct, then most earners can expect some sort of tax reduction in the 1997-98 tax year. Analysts are suggesting that a 2 per cent reduction, for example, in the standard rate of income tax (i.e. from 27 per cent to 25 per cent) will result in as much as an extra £10 per week in take home pay, or £520 in a full year.
By itself, an extra £10 a week will hardly make a dent in the spending pattern of most people, but when used as a lump sum, it can have a real impact on debt reduction, especially if it is put towards a mortgage or personal loan repayment.
Paying off debt should always be a top priority during low inflation and low interest rate periods. An additional payment of £40 a month on a home loan on which interest is calculated on a daily, weekly or monthly basis will have a disproportionately positive impact on the long term interest that you pay. The reason for this is that a portion of that extra payment is being put towards capital repayment. Every slice of capital you pay off each month is a slice of capital to which no future interest is paid.
Accelerating the capital repayment this way is particularly important for newer mortgage holders since they pay the greatest amount of interest in the early years and less capital, but it is to everybody's advantage to pay off a mortgage early.
Check with your bank to ensure that any additional payments are used to reduce the mortgage each month; some lenders persist in the outdated method of calculating interest reductions once a year. If your lender is one of these, you should save the extra £10 a week separately and make the lump sum payment as near to the date as possible when the lender calculates the interest reduction. (You should also think about switching to a lender who calculates the interest reduction on a regular basis.)
If you do not have"a mortgage, or if your mortgage is close to maturing (and you are paying off mainly capital), you might consider using any tax windfall towards reducing other debt. Ask your bank manager if he will consider renegotiating the repayment terms of your monthly car or personal loans to reflect your improved cash flow. A number of the banks we spoke to suggested a lump sum payment every six months as a more satisfactory arrangement.
Keep in mind that any change to fixed rate contracts will usually result in interest penalties. Whether you increase your payments each month, or every six months, the end result should be to cut the number of repayments, thus saving you future interest.
Finance houses - lenders who arrange hire purchase agreements - do not tend to be quite so flexible about extra payments, but make sure to ask. They may agree to clear the loan early without a redemption penalty - with one large lump sum payment.
People with stubborn credit card balances can always set up a monthly standing order to reduce their bill by the size of their tax windfall. No penalties will be charged and it will certainly go some way over the year to diminishing the impact of the 26 per cent APR on some of the major bank cards.
Another good outlet or even a modest tax windfall is a savings scheme for yourself or your children. Most of the latest generation plans being offered by the banks or insurance companies require minimum monthly savings of about £50.
You can choose from very low risk deposit products such as the high yielding education plan from ACC Bank; Irish Life's Credit Club or An Post's Instalment Savings Plan. Savers with a slightly higher risk profile may want to consider the PIPS and PEPS (Personal Investment and Equity Plans) on offer from Ark Life, Lifetime and Irish Life. The entry costs are low, charges are spread out over the life of the contract - which you choose - and returns reflect the performance of the various, usually blue chip domestic and international stocks and shares in the portfolio. (The 10 per cent DIRT option under the PEPs usually require a higher savings amount.)
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